CPIM Practice Exam

Which are the two main components of carrying inventory costs?

1. Capital costs and production control costs

2. Capital costs and storage costs

3. Production control costs and purchasing costs

4. Storage costs and purchasing costs

The correct answer is: Capital costs and storage costs

The two main components of carrying inventory costs are indeed capital costs and storage costs. Capital costs refer to the opportunity cost of tying up funds in inventory, which could otherwise be invested elsewhere. This cost is critical because it reflects the financial impact of having capital tied up in unsold goods, which can limit a company's ability to invest in other areas or respond to opportunities. Storage costs include expenses related to the physical space needed to hold inventory, as well as costs for handling, insurance, and security. These costs accumulate as inventory is held over time and can represent a significant portion of total inventory expenses. Together, capital and storage costs provide a comprehensive view of the total costs associated with carrying inventory. Understanding these components helps organizations make informed decisions about how much inventory to hold and how to manage it effectively.